Gold Will Outperform Stocks, Bonds, And Real Estate

By Bulls and Bears:When allocating capital to asset classes, investors must analyze the underlying fundamentals before determining which investment provides the best outlook for their investment dollar. The following analysis will describe the outlook over the next 3-5 years for each of the major asset classes: 1. Stocks, 2. Bonds, 3. Real Estate, and 4. Gold.Stocks:

Current Valuation:Raw Data Source:http://www.econ.yale.edu/~shiller/data.htmLooking at Robert Shiller's cyclically adjusted P/E ratio, it highlights the fact that the stock market is overvalued on an adjusted P/E basis, with a current adjusted P/E ratio of 21.9 vs. a long-term average of approximately 16x earnings.Corporate Profits:Note: Corporate Profits as a Percentage of GDPSource: GMO's James Montier: "What Goes Up"
Corporate profits are mean reverting and above the historic average of 6%. Over the next 3-5 years higher input prices will add significant pressure on margins. Compounding the problem is the fact that analystsComplete Story »

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I am a big fan of Cyclically Adjusted PE Ratios commonly known as CAPE, Shiller P/E, or P/E 10 ratio.CAPE is a valuation measure applied to stock market indexes. It's defined as price divided by the average of ten years of earnings (Moving average), adjusted for inflation. The essential idea is earnings are mean-reverting making forward looking earnings frequently too optimistic, and current PEs too high following steep corrections.

Robert Shiller's famous stock market valuation metric — the cyclically-adjusted price-earnings (CAPE) ratio — is at 25.4x right now. CAPE is calculated by taking the S&P 500 and dividing it by the average of ten years worth of earnings. If the ratio is above the long-term average of around 16x, the stock market is considered expensive.

“What you’re now seeing,” said President Barack Obama on March 3, 2009, “is profit and earning ratios are starting to get to the point where buying stocks is a potentially good deal if you’ve got a long-term perspective on it.”
OK, so his handlers couldn’t drill the lingo into him quite right. We presume he meant “price-earnings ratios.”
No matter. The rest was history. Six days later, the S&P 500 bottomed at the infamous 666. It has since climbed 178%…

Legendary UPenn-Wharton finance professor Jeremy Siegel has a problem with a valuation ratio developed by legendary Yale economist Robert Shiller. In a new piece for The Financial Times, Siegel goes after Shiller's cyclically-adjusted price-earnings ratio (CAPE).

Robert Shiller is a professor of economics and finance at Yale University. He is the author of Irrational Exuberance, which in 2000 predicted the collapse of the tech bubble and is now in its third edition. He was awarded the Nobel Prize in Economic Sciences in 2013 for his work on asset prices and financial market behavior. In the attached interview he observes that the recent equity run-up seems to be driven more by fear than by exuberance, as a lack of confidence in the future prompts investors to save more and thereby bid up asset prices.

Asset allocation is the most important decision in constructing portfolios that meet clients’ goals. Two prominent figures in the investment world recently offered sharply different perspectives on the most prudent approach for advisors.

MyPlanIQ submits: Yale Professor Robert Shiller has devised and maintained his Cyclically Adjusted Price Earning ratio (CAPE10) as an alternative to the P/E ratio to value the U.S. stock market.CAPE10 is defined as the ratio of price to the average of the last 10-year trailing S&P 500 annual earnings.